Features » June 5, 2006

Bankruptcy Law in Shambles

In December, Alfonso Sosa, a house painter in Fredericksburg, Texas, fell behind on the payments for the mobile home he shared with his wife Melba. The mortgage holder moved to foreclose, and Sosa filed an emergency petition in federal court for bankruptcy protection. But the Sosa family quickly ran afoul of the country’s new bankruptcy law, which had gone into effect only six weeks before. One of the many new provisions requires all debtors to take a simple, one-hour credit counseling class before they file, but the Sosas had not known about the requirement.

Although Sosa had taken the class by the time they got back to court, U.S. Bankruptcy Judge Frank R. Monroe quickly dismissed their case, leaving the Sosa trailer open to foreclosure.

Monroe was furious, not with the Sosas, but with Congress for tying his hands. “Can any rational human being make a cogent argument that this makes any sense at all?” he wrote in his opinion. He even accused Congress of colluding with the nation’s credit industry “to make more money off the backs of consumers in this country.”

“It was very surprising that he came out swinging in that opinion,” says David Aaron DeSoto, a bankruptcy attorney in Corpus Christi, Texas, who occasionally practices in Monroe’s court. Soto says Monroe is known as a calm, careful judge who writes moderate opinions. “My frustrations and anxieties don’t matter much,” Soto says. “But Congress and the country should be paying attention to the judges.”

Monroe is not alone. Across the country, federal bankruptcy judges have begun to express frustration with the Bankruptcy and Abuse Prevention and Consumer Protection Act of 2005.

“No judge is comfortable doing something they know is unjust,” says U.S. Bankruptcy Judge Leif M. Clark, of San Antonio, Texas. However, judges all over the country have had to dismiss cases similar to the Sosas, he says. “I haven’t taken a survey,” he adds, but the critical reaction from bankruptcy judges crosses political boundaries. “I’ve gotten feedback from a wide variety and everyone says it’s badly done.”

“Unquestionably, this is the most poorly written piece of legislation that I or anyone else has ever seen,” says U.S. Bankruptcy Judge Keith M. Lundin, who has overseen cases in Tennessee since 1977. “No one has ever seen a piece of garbage like this,” he adds. “There’s going to be the most fantastic anarchy in bankruptcy courts for years.”

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Many opponents of the new law hope that judicial frustration over how to interpret its hundreds of sections will help fuel a backlash, and allow a future Congress to knock out provisions, such as the credit counseling, that have made filing for bankruptcy more onerous.

Others are skeptical.

“There is a need to do it,” says a House Democratic staff member, “but a strong inertia comes into play when you have a bill this contentious and complex.” After struggling over the bill for about eight years, with the financial services industry spending millions in lobbying fees, members of Congress are experiencing bankruptcy exhaustion, the staff member says. In addition, “there is nothing the courts are saying now that the Congress did not hear in committee.”

The law was the most comprehensive overhaul of the nation’s bankruptcy law since the late ’70s. “That [overhaul] was analyzed line by line on a bipartisan basis,” says Kenneth N. Klee, a law professor at the University of California-Los Angeles and former head of the National Bankruptcy Conference, an elite group of about 60 experts that has advised Congress for decades. “This time, and I say this as a Republican, [Congress] paid a lot more heed to the credit industry and other moneyed interests,” Klee says. “They ran it by the people who paid $100 million in lobbying fees to get this through.”

Klee says that only about five people, including Todd J. Zywicki, a law professor at George Mason University in Virginia, and several lobbyists, wrote the legislation. A group that small can’t coherently revamp something as intricate as the bankruptcy code, Klee says. Neither Zywicki, nor the office of Rep. F. James Sensenbrenner (R-Wis.), the bill’s chief sponsor in the House, returned calls seeking comment.

Hundreds of law professors and judges tried to weigh in, testifying before Congress and signing letters denouncing the proposed reforms. But they were no match for the coalition of credit card companies, auto lenders and home mortgage providers who claimed that many Americans who filed for bankruptcy–a record two million families in 2005–were abusing the system. The law easily passed both chambers last April.

Most experts say that since so few people are filing under the new law, evaluating the effect of the changes will be difficult for at least a year or two. According to Lundquist Consulting Inc., a giant rush of about 500,000 debtors filed for bankruptcy in the week before the new law became effective last October, but less than 30,000 filed in the next month.

However, some numbers have come to light, and the law’s opponents are having a tough time not saying, “We told you so.”

Throughout the legislative battle, creditors claimed that hundreds of thousands of debtors were filing for Chapter 7 bankruptcies every year–which offers them a fresh start by clearing most debts–even though they could afford a Chapter 13 bankruptcy, which requires debtors to work out a payment plan with their creditors. To help curtail the alleged abuse, families who earn more than their state’s median income are subject to a complicated “means test” designed to force many into Chapter 13 repayment plans.

But in February, the National Association of Consumer Bankruptcy Attorneys published a survey called “Bankruptcy Reform’s Impact: Where Are All The Deadbeats?” The association asked 10 leading credit-counseling agencies to provide data on the debtors they had begun seeing in October, and received a complete response from six. They found that less than five percent of their 60,000 debtors had sufficient funds to pay off their debt even under a Chapter 13. Nearly 80 percent had been driven to bankruptcy by medical illness, divorce, the loss of a job, or another force beyond their control.

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Although the prospects for revisiting the bankruptcy code are not bright, some experts believe congressional inertia might be overcome if some of the biggest supporters of the 2005 reform conclude it’s not creating a financial windfall. For example, Jack Ayer, resident scholar at the nonpartisan American Bankruptcy Institute, says, “When everything settles down the credit card companies will be losing money on it.”

“It’s such a poorly thought out piece of legislation,” says Henry E. Hildebrand, a U.S. bankruptcy trustee in Nashville, Tennessee. He currently administers about 14,000 bankruptcies, deciding when and how much debtors need to pay their creditors. “They put too many loopholes in there,” he says. Under the old law, Hildebrand says he could force higher-income debtors filing Chapter 13 bankruptcy to give up a vacation home or car. Now, however, he says a debtor can claim that money used for car payments, even for a new Mercedes, can’t be redirected to pay off other debts. Hildebrand claims these new rules were inserted at the behest of auto and home lenders, who wanted to ensure they got paid before the credit card issuers. “The new law is good if you’ve got a lot of toys,” he adds.

For now, the Sosas and their three young children have hung onto their mobile home. They filed their bankruptcy case again, this time with the help of James Chapman, a bankruptcy attorney in Fredericksburg. The Sosas hope the house-painting business picks up and they can forge an agreement in court to hold onto their house and continue making payments. Chapman, however, says that the new law has “made everything more difficult and more expensive.”

Chapman and other bankruptcy lawyers say they now have to collect their clients’ tax returns, several months’ worth of pay stubs and other documents just to get them through the means test, and therefore, have to charge higher fees. The Sosas have had to pay him an extra $1,000 to handle the case, Chapman estimates–money that could have helped pay down the family’s debt.

The new law, he concludes, “has made life a lot more difficult for people in America who are having hard times.”

I will stop with this train of thought after this comment, and even let Anna have the next and last word, but if Anna and her experts think that people like me are the problem then I repeat my judgment: This paranoid line of thinking is over the top and not helpful.Posted by Meghan on 2006-06-20 10:20:29

Do I give the greedy too much credit? No, IMO I give them too little credit for the Machiavellian reality they repeatedly create. It is quite masterful, the reason why there are so few whistleblowers on all this, is the most masterful of all. If I had a penny for every banking executive who said "Anna this is so *criminally* wrong, but I have a family at home... and these people have more 'money than god..." I'd be quite wealthy. Eventually we've all become their enablers of those in the power-elite who are indeed criminally "over the top".
I have eyes wide open to the depth of mischief the power elite has wreaked on the backs of the middle and lower class these past 50 years. I have also had access on Wall Street - from not only within the consumer credit policy making divisions, but also the top banking arenas that participate in setting Credit and Money policy worldwide. So, I think I am qualified to assess "over the top".
On my radio segment, I have people from all over the United States in absolute anger from their specific run-ins with "the shambles" - telling me not to give more examples of how "over the top" it is, they know first hand, but what they can do about it.
There are about a dozen sterling investigative reporters on the matter of global financial systems and the machinations of the power-elite behind it. I found it very educational to speak with them - to vet all this. They come from all dimensions of the political spectrum. They have written books, many best sellers on what really runs the global financial and power structures, and what it is leading to. They all say the same thing.
One might ask them if what I have put here is over the top. I have passed this link to a few of them and those I have heard back from have stated that responses like this, drive *their* frustration over the top, "so many people do not see it coming and deserve the country they get".
For instance, the people who were ousted from their homes by the military recently in Colorado - who are quite easily found through various internet sites protesting those "robber baron raids" - if anyone has lived through "over the top" and earned the right to use that phrase, they have.
So, please do READ the CFR final report, and the Pastor book, Pastor being a contributor to that final CFR report.
AnnaPosted by annarovita on 2006-06-20 09:56:27

This is very over the top Anna.
I should have protested when you made a big mis-statement in your first comment: "THIS group of [ wealthy] repetetive filers were the ONLY group actively sought out by credit card companies to reissue cards. " Almost all credit card companies actively solicit people right after bankruptcy. Poor or not, their mailboxes overflow. What you say isn't true but I thought perhaps it was just mis-communication. You said you used to work in the industry. You might know something I don't ... but this last post isn't reality.
Any fair reading of the new law makes one start thinking of the phrase "indentured servitude." But conscious and aggressive creation of an under-class? You give the greedy too much credit, and you scare yourself when you could be doing some good.Posted by Meghan on 2006-06-19 12:24:32

The final report of the Council on Foreign Relations portends a grim blueprint for the 21st century: grim, that is, for "We the People" but ensures the moneyed power elite finally have attained their "promised land".
From what I have been following, a destructive bankruptcy law - destructive in that it is in place to ensure an average person's financial decline is a permanent one - will create a population of "the desperate and needy".
The wretched bankrupcty law is just one of a well-thought out series of nails-in-the-coffin to ensure the removal of any semblance of a class other than the very desperate,the very needy and the very rich.
The final plan, as the just released CFR report states, is to remove the sovreignty of the three countries of North America - the US, Canada and Mexico. One of the architect's of the final reports - Robert Pastor's August 2001 book - of which the final CFR report is just a watered down version - does indeed state the only problem standing in the way is "the people's" pesky attraction to their "sovreignty", you have to realize that it is not in their best interests to have any class except the very rich and the very poor.
The CFR final report is must reading to context the bankruptcy law's true intent, and exactly why it appears "a shambles". It is a shambles ONLY if we think a fair bankruptcy law was their true intent.
The CFR final report should send chills down every American person's spine - the next step is eminent domain. If we think the days of land-grabbing robber-barons are over, we haven't seen anything yet.
If we think the US army will not be deployed to walk in and get us out of our generationally held homes, think again: it is happening as of this writing in Colorado for one, Utah as well, and next down to Texas. Those who have stock-piled weapons "to fight to the death", have eventually been physically removed from their property, with rifles in their hands. What then happened to their homes? It will make you sick, but you need to pay attention there. Some of these poor people declared bankruptcy after being forced off their homes and compensated a rude tuppence for their real estate ... guess what happened to them... and guess who now owns their land and homes?
The private-public institution/enterprise structure has been identified and is being put in place and vested with powers to carry this out. They ended up owning the homes.
If we think the bankruptcy law will be "fixed" forget it, short of another American Revolution start saying goodbye to everything America used to stand for.
So the final report ("solution"?)is to be read as a huge red flag of a very nasty program unfolding about our disbelieving eyes.
I hope In These Times will do a series of exposes on this, and link that "CFR final report" with other "nails in our coffins", such as the shambles at our borders, the shambles of our foreign policy, the shambles homeland security is in, the shambles of our tax law, in fact the shambles of all our systems from education, health care, insurance and the drug laws and prison systems.
One would think with all these shambles we are a nation of complete idiots, instead of a nation that is blind or paralyzed in terror and disbelief of the ultimate blueprint unfolding.
Anna
Ex. American Express Quantitative Analyst, Marketing Dept
who knows a bit too much about what credit in the uS was all about.Posted by annarovita on 2006-06-19 09:34:36

As one who couldn't even afford to file bankruptcy I must say that the credit card companies actually make tons more money off the poor than the rich because the poor carry a balance over into the next billing cycle and pay high interest and fees. The poor pay usurous interest rates on small amounts of debt more than covers the bankruptcies of the rich whose "good credit" allows them to get back into the game after filing. They are even considered great risks because they are no longer liable for past debts freeing up all their income to pay new bills. It is a shame that the bill actually discriminates against poor creditors over the rich who actually play the system and are protected by their ability to hide their income in expensive luxuries as the article suggests. It is well known how credit card companies actually build into to their profit calculations a certain amount of bankruptcy anyhow. They push credit on people with this in mind and further begin to share credit information with preditory merchants in order to boost the poors' buying habits luring them into a kind of debt trap. This bill is just another way in which the poor in America are getting the shaft.Posted by cabdriverinchicago on 2006-06-18 23:29:28

The law was first voted out of committee under Clinton. I hate to say it but I think the Democrats who did this were trying to boost their "Mom-and-Apple-Pie" credentials while also relying on Clinton to veto it. No one likes a debtor; better not to go on record supporting them; let someone else take the political hit. You have to suspect they liked the lobbyist money they were getting too.
I wrote Dianne Feinstein, who was one of the Senators originally voting it out of the Judicial Committee, but she manfully parroted back all the nostrums about the burden on bankruptcy on the non-debtor population. She did this for years as I emailed my objections, for years.
No outrage till the end, when the Republicans prevented all (or almost all) amendment in the days right before final passage. Now that was a really thugish piece of Republican final maneuvering, but the amendments Feinstein was pushing at the time were also ludicrously narrow and non-responsive to the obvious problems with the bill. She never engaged with the issues at all and really, this was an obscure area of the law where discussion should have been possible. It wasn't like gay marriage or the war, where everybody gets riled instantaneously. But the intelligent debate never happened, for almost a decade.Posted by Meghan on 2006-06-16 07:53:39

I did do quite a lot of reading about this proposed legislation before it was passed and signed. After the senate vote I could now believe that 17 democrats in the senate had voted for it. This was outrageous, what had happened to the party that supported the working class of this country? I had to email each of them and vent, we hear about the whores in the MSM, what about the whores in the congress. I am very hopeful that this Nov will be a major blood bath in the so-called 'representatives'!Posted by racom on 2006-06-16 07:26:34

Those individuals who did abuse the system (since the 1950's actually) and filed repeatedly for "bogus" bankruptcy - were in the top income percentages across the board (all states).
Interesting, THIS group of repetetive filers were the ONLY group actively sought out by credit card companies to reissue cards.
The ordinary person encounters not only great social stigma for filing bankruptcy but also housing discrimination. In the low to median income housing markets, a bankrutpcy filing disqualifies a person out of hand.
The wealthy person or corporation filing bankruptcy experiences zero social stigma, it is considered an acceptable financial mechanism, sort of a "Born Again" financial renewal.
Anna
Ex. American Express Quantitative Analyst, Marketing Dept.Posted by annarovita on 2006-06-15 11:45:42

Great article Brian! I hope all is well with you!
-Jocelyn Prince (former Chicago Reporter intern and freelancer)Posted by jprince on 2006-06-14 15:35:33

Mark the day. For once I am in 100% agreement with this article and the comments posted so far. Our elected representatives have failed us in a disgraceful fashion. Shame on credit card companies and other predatory lenders who not only charge exorbitantly high interest rates ostensibly to cover the cost of deadbeats, but then turn around and try to get yet another pound of flesh from people who in many case have had some catastrophic event befall them. I'm disgusted by all the actors in this obscene show of rapaciousness and amorality.Posted by crashtech on 2006-06-08 17:23:01

I have only one thing to add, and it was said in writing and penned on July 4, 1776, by men far wiser than me, but based upon the current state of, for example, the BAPCPA (or BARF), all but forgotten by too many:
Governments are instituted among Men, deriving their just powers from the consent of the governed, Posted by esbinlaw on 2006-06-07 04:50:29

Sounds like this piece of bipartisan BS fits right in there with the 401(k) plan, The American Jobs creation Act of 2004, NAFTA,CAFTA and all the others designed to serve the big campaign donors.
I understand there are now 36,000 lobbyists in Washington Posted by whattheheck on 2006-06-06 11:25:23

There's more.
There are provisions which cannot practicably be enforced across the board, on all lawyers who practice before the courts. Current wisdom is that they will be helpful in catching the bad apples though ... This should bother you.
There is a section that restricts legal options which can be discussed unless the client has a minimum asset structure. I.e., there are things you are prohibited from telling poor people but can suggest to the wealthier.
The lawyer is required to investigate his clients, whether or not in her judgment the investigation makes sense or is cost-effective.
The lawyer is required to initiate discussion of dishonesty with the clients, and have them sign paperwork demonstrating that perjury has been discussed. Any system in which the option of perjury is considered at the get-go is a system in trouble. Many first interviewees have a palpable desire to disclose and make amends. To advise someone who hasn't thought of it yet that the system can be gamed is an outrage.
To opine that everyone has already thought of gaming the system is an outrage.
To opine that debtors are more dishonest than the average client who hires a tax attorney ... that would be an outrage if it wasn't so laughable.
To opine that the bankruptcy problem was caused by the legislation, rather than by a credit industry that ignored market forces and continued to lend to people no matter whether they filed a bankruptcy or not ... 'tain't true Magee. Where is our commitment to market justice now?
The Office of the US Trustee has become the collection arm of the vehicle finance business.
Don't ignore this. If you get through life without needing a bankruptcy lawyer, that's great but if your child marries that bimbo or bum; or your entrepreneurial venture hits the market and bounces off; or your company tanks and takes your pension with it; or you get sick; or your child gets sick. America was built on the idea that there are economic second chances. It's in the Constitution, but it's not in BAPCPA.Posted by Meghan on 2006-06-06 06:52:57